The SEC Sues Telegram

The SEC announced a suit to stop Telegram, Inc. and Ton Issuer, Inc. from continuing what a lawsuit describes as an "ongoing illegal offering of digital-asset securities called Grams." Grams were to be the native token for use on the Telegram blockchain, but the SEC says they don't have any utility at all, never did, and are securities subject to the registration requirements of U.S. securities laws. This has the potential to be a significant speed bump for what was among the largest and most coveted token sales of the ICO age. As part of the lawsuit, the SEC also secured an emergency temporary restraining order against the company from (among other things) continuing to deliver or sell Grams to anyone.

Telegram raised $1.7 billion from 171 initial purchasers using a Simple Agreement for Future Tokens (SAFT). They used those funds, allegedly, to "capitalize its business and finance the creation of its blockchain" (the "TON Blockchain").

The SEC says that $424.5 million of the sale proceeds come from American investors and that the defendants are about to sell more to Americans. The SEC say that this violates the registration requirements of the Securities Act of 1933 and entitles them to immediate injunctive relief, expedited discovery, disgorgement of ill-gotten gain and interest, an Order stopping them from selling or distributing more Grams, and a civil money penalty.

Here's the problem, as the SEC seems to see it: the Grams tokens are themselves securities. There are a couple of reasons for that. Among other things, the purchaser and subsequent investors expect to profit from Telegram's work, there are no products or services that can be bought with Grams, and there's an expectation of profit on the part of investors if Telegram builds the thing.

And here's an even huger problem that the SEC sees, Telegram committed to delivering and selling Grams. But it never registered Grams as a security with the SEC for the planned offering and it also plans to make them available on crypto exchanges. In short, "once these resales occur, Telegram will have completed its unregistered securities offering with billions of Grams trading on multiple platforms to a dispersed group of investors." Once the tokens are available on public markets, the SEC points out it will "be virtually impossible to unwind the transactions" given the "variety of unregulated markets" they will trade.